Posted on 11/29/2007 7:11:00 PM PST by LowCountryJoe
Pat Buchanan's recent attempt to diagnose the sinking dollar demonstrates that ignorance of basic economics is not limited to the Left. Buchanan points out the plummeting value of the dollar relative to other currencies and major commodities such as gold (up 24% this year) and oil (up over 50% in 12 months). He then declares that "the prime suspect in the death of the dollar is the massive trade deficits America has run up" to "maintain her standard of living and to sustain the American Imperium." This diagnosis offers a tantalizing glimpse of the truth, yet shatters it with protectionist bromides.
First, let's deflate the protectionist rhetoric. What are trade deficits and surpluses?
A trade deficit means that in sum, American dollars are going abroad in exchange for foreign goods. Consider what this means. If foreigners never cashed in those dollars, Americans would essentially be getting foreign goods free of charge. Protectionists like Buchanan condemn this as "borrowing," but this is actually a form of investment — both in US industry and in US dollars. Foreigners have been investing in the United States for decades for two primary reasons: the superior returns due to the growth potential of American capitalism, and the dominance and (relative) stability of the US dollar, which made them useful as a means of exchange apart from their purchasing power of US goods. Americans are not living "beyond our means," as Buchanan claims; we are simply a more profitable investment, with a more stable currency, than the foreign investors' own countries.
A trade surplus on the other hand, means that in sum, US goods are being sent abroad in exchange for foreign currency. A trade surplus is a form of investing in other countries, since (fiat) foreign currency is only worth the foreign capital it can purchase. This happened after World War II, when the United States sent capital to shattered foreign economies and reaped returns as the value of their economies — and thus their currencies — grew.
So are trade deficits preferable to trade surpluses? In a narrow sense, yes. A nation that has strong economic prospects will attract foreign investment and therefore experience trade deficits. Conversely, when the domestic economy is stifled by regulations and monetary manipulations, investors will send their savings abroad and their country will run a trade surplus. (This explains why the US deficit has consistently fallen during recessions and grown during periods of expansion.) However, the broader lesson is that trade inequalities indicate the net flow of foreign investment, and the benefit of the inequality is ultimately validated by the profitability of those investments. Profitable foreign investment results in GDP growth and positive currency valuations, whereas unprofitable foreign investment erodes economic growth and devalues the currency of the investment's recipient. Could a sufficiently large and wasteful investment be responsible for the current dollar crisis?
A large part of the US trade deficit comes from the bonds (treasury securities) the US government has been selling to foreigners to finance the growing federal budget deficit. The value of these bonds depends on both the strength of the US economy and the loss of value caused by expansion of the money supply. When the US Treasury sells bonds to individuals, it diverts savings from private investments; this diversion is a form of taxation. When it sells bonds to the Federal Reserve, it exchanges bonds for newly created dollars, which is a form of monetary expansion (inflation). Additionally, when the government sells debt to foreigners, it creates a liability against the US economy. Foreigners buying deficit debt are in essence betting on the ability of the government to provide a return on the investment in the form of positive economic growth. What happens when the investment fails to turn a profit?
The primary reason for the $9 trillion federal deficit is the so-called "War on Terror," including the spending on Homeland Security, Afghanistan, and Iraq. Unless you believe these funds averted an economic meltdown due to terrorism, these funds represent a near-total loss. Tanks, bombs, and bureaucratic paper pushers consume vast funds, yet they contribute nothing to the economy, aside from benefiting military contractors. This economic destruction is one of the biggest reasons for the declining dollar. (Perhaps the major reason is the credit bubble created by the inflationary policy of the Fed since the early 2000s, which is now collapsing and making the economy less attractive as an investment target.)
The falling dollar will make it increasingly expensive for the US government to accumulate more debt. Eventually, it will be forced to either cut spending, explicitly shift costs to US citizens by increasing taxes directly, or (most likely) increase taxes through higher inflation. Investors have already anticipated this and flocked to other currencies and to gold as a refuge. The slide will likely continue until some kind of budget reconciliation is evident.
The overwhelming response to the problems created by the government's financial irresponsibility has been to call for more protectionism, as Mr. Buchanan is doing. Because it creates barriers to trade and investment, protectionism makes the US dollar less valuable to both foreign consumers and investors, thus accelerating the fall of the dollar. Investors have certainly anticipated this as well — but don't blame them for betting on the gullibility of Americans to the protectionist rhetoric of economic ignoramuses like Paul Krugman and Pat Buchanan.
If we can avoid the protectionist trap and reconcile the budget, the falling value of the dollar will eventually attract investors and stimulate exports. As the developing world becomes richer and freer, the US dollar is unlikely to enjoy the unchallenged superiority it once had, but maturing foreign markets will attract products and services designed in America, and we will once again become a recipient of foreign investment. Free markets and American ingenuity made the United States the greatest economy in the world. They are the only way we will keep it that way.
If you represent Hunter’s actual trade position, then he’s even more dangerous to the US than Ron Paul...
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He’s too smart to rant like me.
Yeah, those Marxist free traders we keep hearing about (from the guys advocating a greater role for the state in the economy). The ones who favor the abolishment of private propety. /protectionist idiot mode off
propety = property
Walmart is a warehouse, not a manufacturer in China. This disgussion is about tariffs, not Walmart.
That’s an outright lie. You are running purely on emotion not reason or facts. Buy a loudspeaker from Eminence Speaker in Eminence, KY, and tell them to use ONLY American sourced parts (something they don’t do because of pricing).
I’ll get the EXACT SAME loudspeaker from a factory in China or India. And even with the 5% import tariff AND price of shipping across the ocean, I’ll beat the Eminence price by a factor of at least 2.
Then we’ll take our loudspeakers to the local market, and see who sells out first, with the standard 50 point markup... You see, I can make 50 points selling at the same price that you PAID for your loudspeaker. I make profit, you make zero.
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Oh. Duh me, you already said what the price was.
Yes, aint you smart. Its cheaper in China and India. *slow clap*
Why is it cheaper in China and India? Is it because the Chinese and Indians are superior speaker makers? Is it because the Chinese and Indians have superior infrastructure to transport speakers? Is it because the Chinese and Indians are genetically engineers to produce better speakers?
Just how do the Chinese and Indians produce such cheapo speakers anyhoo?
C’mon you can say it. Be honest. Let it all out. Cry on my shoulder.
But if you can live with Hilary in the White House, ain't nothing I can say.
Did I mention we sold a commodity product?
I will guarantee that if you give me an Eminence speaker built solely in the US (including all the parts), I will match the quality 100% and do it for half the price. Guaranteed, and I’m willing to put my money where my mouth is - I do it every day, been doing it every day for the last 10 years.
Even Eminence doesn’t build with 100% American parts, because the cost is so much higher. Steel, oil, wood, cobalt, copper are all world-commodity products. A barrel of oil is the same worldwide, as is a ton of steel or copper.
The difference is that you can pay a $20/hour employee for 30 minutes of labor to assemble the parts, or pay a $0.50/hour employee for 30 minutes of labor. That’s a $9.75 difference in cost.
There’s a reason Eminence sources parts from China, and not only has a factory in the US but in China, too - price. The quality is the same; the price is different.
Where the US leads and excels is in research, innovation, and engineering. Invention. We work smarter, not harder. And these jobs are worth a LOT more - the output of one engineer is multiplied by the 1000 assemblers who build his design. THAT is our strength, always has been. To think otherwise is folly...
I’ll gladly take a team of 10 smart US engineers and 1000 Chinese or Indian workers, versus that same team of 10 US engineers and 10 more US assemblers. Why? I can turn out a LOT more economic value to the country - more profit, meaning more TAXES. Meaning we pay more for the defense of this nation...
Heck, if you want to get right down to it, those who are most profitable by offshoring, and who have the biggest payrolls are the ones who are most American! Why? Because they pay the most taxes. To NOT leverage your assets to their maximum effectiveness is not only anti-American, it’s anti-Biblical...
Go bury your talent in the field; I’ll invest mine with others and return the money many times over.
The difference is that you can pay a $20/hour employee for 30 minutes of labor to assemble the parts, or pay a $0.50/hour employee for 30 minutes of labor. That’s a $9.75 difference in cost.
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*picks nose*
*wipes booger on monitor*
If I don’t go to sleep I will die. Goodnight.
I believe, and correct me if I’m wrong, that you and I have agreed in the past, that there are winners and losers in these so called free trade deals?
WAL-MART doesn’t pay tariffs? Man, I wish I knew how they did that! I’d love to avoid the tariffs on products imported to the US...
Please tell me you're kidding?
We have lot's of folks here in Oregon who'd kill for a $10.00 P/H job.
By way of illustration, I know of a plant where folks get $7 plus change an hour to stand in front of a hot machine pulling freshly molded (and hot) items out of a finishing oven.
So because that's the best they can do, you want them on the unemployment line?
No wonder "smart money" folks are betting on Hilary! to take office,
We now return to the thread in progress.
After my dream of coast to coast cheap boob and fanny reduction clinics fell through 'cause nobody wants to work', I went back to my second luv.
I opened a cabinet shop, kept it small, 3 to 4 guys. I occasionally used temps, particularly when grunt work like unloading trucks came up.
And I have to tell you, we have a lot of Americans who are topped out skill wise doing those nasty jobs.
And I saw a lot of skilled people who lost their jobs when Freightliner moved to Mexico, just for an example. Some here say to those folks, "tough, should da picked some better genetic contributors, now go on welfare".
But as I never - ever want to see another liberal/leftist Democrat in the White House, I have to recognize these folks have a vote that counts just as much as mine.
So the investigateworld wagon train can't leave them behind.
Add in the fact I believe China will attack us again, I hold to my position, free trade amongst equals only.
Well according to the free-traders, you are obsolete in this new global economy. In fact, 99% of Americans are obsolete. There are 4 billion more people willing to do your job for far far less. Doesn’t matter if they aren’t American either.
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Precisely.
Increasingly, “American” companies no longer are helping America.
They are now actively damaging our nation. For money.
Where I come from, that’s known as treason.
A lot of people have for so long instinctively understood “what’s good for GM is good for America”, they will fight kicking and screaming the realization, that a lot of so-called “American companies” are selling us down the river.
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